Monday, November 1, 2010

Got an hour to invest in your own future? If so, this interesting video will probably be educational on many fronts. Lebed’s stuff always appears a bit more dramatic than many people think it should be but I think that at some point within the next decade (perhaps a good deal sooner) there's a better than even chance that his drama might actually turn out to be understated. If you choose to watch it then note he is calling for immediate hyperinflation which I think cannot happen as long as housing prices are still falling (and they most certainly are). But after they do bottom then there is no doubt that we will see massive inflation (10-20% per year) or hyperinflation (20-200% per year) because money printing is all that the fiat currency con men really can do once the people are taxed to the limit. When people see money getting printed like that they lose confidence in the currency and begin to look for ways out. Is it any wonder that the price of gold went from $35/oz in 1971 to $1350/oz today? In case it's not immediately obvious, this has far outpaced the Dow Jones Industrial index even when dividends are factored in. Gold is the escape hatch.

For people who are still putting money into a government controlled retirement account, think for a second what those levels of inflation will do to your savings. Right now you can still take your money out by paying taxes and a 10% penalty (with other necessary preconditions). Sooner or later the government will cut off that avenue of escape and that will be a major sign for me that massive inflation is very near. I say again, retirement accounts are the only significant remaining source of wealth in this country now that housing equity has gone bust and so the government will at some point have to confiscate them in some form or fashion just like Argentina and many other governments have done in the past. They will do it in the name of your safety but it will be handing the keys to the hen house over to the foxes. The easiest way for them to do this will be to lock you into the account and then inflate the buying power of it away.

Underpinning my views is the fact that the national debt has gone exponential:

It was allowed to do this because all of the safeties and restraints on economic prudence were completely removed when we left the gold standard in 1971. You can clearly see how the debt took off after that event from the following graph. I am disinclined to believe that it is a coincidence that the debt began to unveil itself as an exponential function so shortly after that event occurred. I just don’t think that we get 30 years of a certain behavior (1940-1970) changing so rapidly unless there is a good reason – some sort of trigger:

A closer inspection reveals the sad truth that exponentially higher debt is being required simply to maintain the status quo. We do not have exponentially better anything (infrastructure, education, health care, etc.) because of exponentially higher debt. We just have massive government that cannot exist as it has been without taking on ever higher debt. The following chart overlay is good evidence of this. The spikes represent recessions and the dips represent recoveries and even boom times.

We had several rapid recessions just after leaving the gold standard but since then recessions happened about once every 10 years or so. From 1965 to 1980 it didn’t take much government stimulus/intervention to recover as you can see from the slowly rising debt chart for that time period but as time went on it took exponentially rising debt in order to maintain the one recession per decade frequency. I have to ask whether we ever really got out of a recession if we had to use the national credit card to do it (i.e. jobless recovery). It looks to me like we’ve just been kicking the can down the road for several decades now but that exponentially rising debt will soon put a stop to it. We are at a point where if the artificial stimulus even flattens then it will whack the economy like nobody living has ever seen before.

One of the big lies we are told is that during bad times the government has to borrow and stimulate - Keynesian style - in order to keep things humming but that we shouldn’t worry because when good times come we can pay it back. The government thus represents itself as a giant economic shock absorber. Unfortunately, it is the big lie because the economy is so much bigger than the government is. The truth of my statement is right there in the data. 1995-2000 was the dot bomb boom fueled by Greenspan removing all the safeties and limitations from the fractional reserve banking system. As a result, credit based money was flowing. Boondoggles were flowing. Anyone with a pulse could get a business loan. Credit induced corporate profits were flowing and salaries were skyrocketing leading to a massive short term tax windfall. It was such a massive (albeit unsustainable) influx of tax revenue that it even allowed President Clinton to take a victory lap for having a balanced budget. Think about it. Dot bomb was wild economic times like we may never see again in our lifetimes and the best we could do with all that additional tax revenue was to barely keep debt constant for 3-4 years. So much for paying it down in good times. This is not a shock absorber, it’s a one way ratchet. It’s a bold faced Keynesian lie.

Of course, a fair economic analysis shows that all that really happened was that banks and corporations took on the debt instead of the government and the housing bubble was blown up. When all of that bad debt failed it simply reverted to the government anyway. So truthfully, banks and corporations can be thought of as having held onto the government debt during those years but in reality it was always destined to be government debt because otherwise the associated corporate defaults would have scared creditors away from the USA. In other words, it was a financial shell game of “who owns the debt”. It was always government debt in disguise. Clinton's loud talk back then about never having deficits again was just more substance-free political posturing and grandstanding. Clinton was a class A con man.

The most important aspect of this exponential debt expansion is NOT that the debt is getting very large but rather that it is approaching a breaking point (whatever that may be) a LOT faster than most people understand. It is the time aspect we should be most concerned with. Chris Martenson totally gets it and he has a great website that explains the coming changes. He explains the time aspects of exponential math with a story that goes something like this:

Imagine a big water pipe that feeds a football stadium. The pipe is about to spring a leak that will get exponentially worse over time. Imagine that when the leak starts it will drip one drop of water the first minute, two drops the next, 4 drops the minute after, doubling each minute without limit. This is an example of exponential growth. Now imagine that you are chained into a seat at the very top of the water-tight stadium. The leak begins dripping exactly at noon.

Here’s the question: How much time do you have to free yourself from the seat and leave the stadium before the water reaches your seat at the very top? Think about it for a moment. Is it hours, days, weeks, months?

The answer: You have until exactly 12:49pm. It takes this exponentially growing water leak less than 50 minutes to fill a whole football stadium with water. That may seem impressive but the really important part of the lesson is that at 12:45 the leak has only filled 7% of the stadium. This leads you to think that you have hours and hours of time left before you are affected so you don’t work as hard on escaping as you should be doing. Unfortunately, the nature of exponential functions means that the stadium fills up only 4 short minutes later.

When you see someone who is supposed to be an economic authority say “I never saw it coming” you can bet that exponents were involved in the math somewhere. The time to think about this stuff is now because when the problems arrive they will do so relatively suddenly, Madoff style.

Bottom line is that our debt cannot go up exponentially forever yet at this point it must go up exponentially in order to maintain the status quo in this country. What cannot happen will not happen. At some point it will become impossible to continue the exponential debt increase and it will result in a huge economic crash because government spending is just too big a part of our economy to live without at our current level of consumption. Government itself is a bubble that is mathematically guaranteed to burst.